Designer Brands Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
June 8, 2023

There are 5 speakers on the call.

Operator

Morning, and welcome to the Designer Brands Inc. First Quarter 2023 Earnings Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

Operator

I would now like to turn the conference over to Justin Fisher, Director of Investor Relations. Please go ahead.

Speaker 1

Good morning. Earlier today, the company issued a press release comparing results of operation for the 13 week period ending April 29, 2023 The 13 week period ended April 30, 2022. Please note that the financial results that we will reference during the remainder of today's call Exclude certain adjustments recorded under GAAP unless specified otherwise. For a complete reconciliation of GAAP to adjusted earnings, please reference our press release. Additionally, please note that remarks made about the future expectations, plans and prospects of the company constitute forward looking statements.

Speaker 1

Results may differ materially due to various factors listed in today's press release and the company's public filings with the SEC. The company assumes no obligation to update any forward looking statements. Joining us today are Doug Howe, Chief Executive Officer and Jared Poff, Chief Financial Officer. Now let me turn over the call to Doug.

Speaker 2

I want to begin by thanking our team for their continued hard work throughout the quarter. Given the strength of our Q1 last year, which was propelled by the strong return of fashion, coupled with this year's broad based pressure on Consumer, we anticipated our Q1 would face headwinds. That being said, the environment was slightly more difficult than we expected. I was pleased with how our team stepped up to read and react to an increasingly promotional environment and at the same time manage our inventory level appropriately both our retail and brand segments. In the Q1, Designer Brands net sales declined 10 As I just mentioned, the Q1 of 2022 was a robust period Where we saw a net sales growth of 18.1 percent year over year.

Speaker 2

Additionally, our U. S. Retail store traffic Was up 22% last year, significantly outpacing the market. Despite the negative trend that the retail has been experiencing since the Q4 as well as the sequential downtrend in February, March April of this year, We are continuing to see increased customer demand in the casual segment of our offerings. However, the increase in casual sales were not significant enough To offset the decreases in our dress and seasonal businesses within our most important Markel selling season.

Speaker 2

Specifically, we saw a sharp pullback in seasonal products, particularly sandals, which were down 14% in women's And down 8% in men's in the quarter in our retail segment. Conversely, we saw strength in our overall casual category Within DBI, with women's up 7% and men's up 4% in the quarter compared to the prior year And we are leaning on our ability to flex and pivot our assortment to offer even more of the casual brands they want. To mitigate the impact of changing consumer preferences, we quickly altered course, increasing our promotional drivers as we move through the quarter. As we've mentioned frequently over the past year, we have been strategically building back our clearance inventory offering, Providing our value customer segment options at lower price points. And we were able to leverage this further during the quarter.

Speaker 2

Our U. S. Clearance business comps were up 5% on a net basis during the quarter compared to last year. Despite the softness in the quarter, we continue to be encouraged by the progress we are making against our long term strategy of doubling sales of our own brands From 2021 to 2026, while editing and amplifying with our top national brand partners. We continue to see bright spots in owned brands, particularly in the casual category and are very excited to continue integrating Our new brand acquisitions into our portfolio.

Speaker 2

We're pleased with the progress we have made in the quarter, growing owned brands penetration to 27% As a reminder, over the last year, we have acquired Keds, La Tigre and Topo Athletic, All of which we anticipate will help to fuel growth for total DBI and provide for a diversified complement to our dress and seasonal Powerhouse Brands that will continue to benefit us over the long term. Now I'd like to briefly dive into each of these. Let's start with an update on Keds. We are continuing to integrate Keds and are pleased with the performance of the brand to date. Keds saw positive wholesale growth versus its performance last year under Wolverine's ownership and is performing in line with our position expectations.

Speaker 2

Head's recently launched a brand refresh focused on honoring individual expression through playful optimistic style. Our first product collection that celebrates individual self expression is focused on the Keds Champion Sneaker, our original sneaker and icon. Keds Champion sneaker is reinterpreted with different silhouettes celebrating our iconic style, versatility and staying power. The court, which launched recently, is a new style within the collection that pays homage to tennis heritage and has been success with both in line offerings As well as our recent collaboration with Recreational Habit, experiencing very strong sell through in multiple points of distribution As well as on keds.com. Latigre is planned to launch in late summer just in time for the back to school season.

Speaker 2

This brand provides us with another unique opportunity to offer fashion forward athletic footwear at a reasonable price point and Furthers our own brand reach into the athletic category. Much like Keds, it's a heritage brand with a rich history. It offers great versatility and lifestyle and approach and we anticipate customers will be excited to see this online and in stores. Lastly, Topo. This acquisition gives us the specialty athletic brand that we intend to lean into across channels From wholesale and DTC to Topo's already meaningful international distribution.

Speaker 2

We remain on track with our integration plans and are Excited about the potential of this brand. These three brands will strengthen our positioning in the athletic category while moderating Designer Brands penetration To dress and season, creating less volatility related to weather and fashion trends. In fact, during the Q1, We saw strength in our owned athletic brands relative to seasonal and dress categories. In addition to these 3, we are excited to announce that we are working on closing an agreement to become the exclusive licensee of the Hush Puppies brand in the U. S.

Speaker 2

And Canada, a stellar addition to our comfort and casual categories in owned brands. Our DSW segment has been the exclusive retail outlet for Hush Puppies for over 2 years now and this agreement now opens up the opportunity for us To wholesale the brand in the U. S. And Canada as well as operate hushpuppies.com, which will be our 6th independent e commerce site. The Hush Puppies brand showcased robust growth in the Q1 at DSW with growth up 400%.

Speaker 2

This also brings design and sourcing of comfort casual product into our business model, which has meaningful upside for our own brand portfolio. I also want to touch on the performance of several of our legacy owned brands, specifically in the casual category. 1st, Lucky continues to be a standout with women's sandals up 10% to last year. We've seen trend driven demand for Lucky motivated by the resurgence Denim and more Western style. This drove sales of 8% in our DTC channel at DSW in the Q1 compared to the prior year.

Speaker 2

Crown Vintage also performed well and we are pleased with the momentum we are seeing as we continue our celebrity partnership with Emma Roberts, Which includes her specially curated styles and storytelling around the latest spring collection. The collaboration drove 4.6 1,000,000 media impressions over a 5 day period in April. We made meaningful progress in the men's space, Expanding our assortment beyond dress and serving our male customer across categories with a focus on expanding the casual and hybrid assortment. We are seeing encouraging results within this category with both our Vince Camuto and Crown Vintage casual business. Vince Camuto's men's DTC is up 87% for Q1.

Speaker 2

We are offering The breadth of assortment in casuals across different types of constructions, sportier technical constructions and versatile dress hybrids. Several new styles include the introduction of our FLY365 technology. This is an important step for our Vince Camuto brand As it is the beginning of a journey of engaging with our male customer in an expanded manner. Turning to Crown Vintage. Our men's Crown Vintage business is up 32% in Q1 with the growth driven by casuals.

Speaker 2

Crown Vintage is currently the number 5 brand overall for men's at DSW. In a similar way to our approach to Vince Camuto over the last Our focus in Crown has been to grow the casual and dress hybrid assortment for the brand with a focus on natural based materials such as canvas, Chambray and other cotton based materials. Our strength in e commerce continued across many of our brands Our collective homebrands.com ETC performance showed solid growth compared to last year, With vincecamuto.com delivering an 8.3% comp. In addition, topoathletic.com and keds.com Both delivered meaningful new DTC sales to Designer Brands. As we focus our brand building efforts, we continue to find moments To showcase our brands with engaging events, including several at the end of the quarter that generated excitement and drove traffic into stores and online.

Speaker 2

Lucky Brands celebrated festival culture during Coachella, hosting a Desert Mirage themed event featuring surprise performances and exclusive giveaways for guests, including a customization station for trucker jackets. The influencers and attendants were dressed from head to toe in styles from Lucky Brands Festival Collection, Which featured footwear and handbags in crochet and natural leathers, reflecting the cool festival vibe of that moment. Vince Camuto created their own buzz at Coachella, treating VIP guests, celebrities and influencers to the Ciao Bella Festival Fashion Experience, An homage to the Vince Camuto spring campaign titled Ciao Bella. Additionally, in mid April, Jessica Simpson celebrated the launch of her springsummer 2023 collection of apparel and shoe silhouettes. The collection was inspired by Jessica's love of all things denim and features platforms, wedges and slides In amazing fabrics, bright colors and hot metallics, sure to inspire our devoted Jessica Simpson customers to complement their looks this season.

Speaker 2

Complimentary to the Zone Brands initiative, we are committed to our national brand strategy and growing strong relationships With the largest national brands that are most relevant to our retail customer base. We are focused on editing and amplifying our Brands acting as a top point of distribution for our consumers. As part of our edit and amplify strategy, We are excited to build on our partnership with Nike, which strengthens our position as a leader in the footwear and athletic space. This plan will elevate in October this year. Our partnership with Nike will allow us to provide an athletic offering across men's, Women's and Kids, it gives our customers a premium, physical and digital assortment.

Speaker 2

Before I hand it over to Jared, I want to quickly touch upon our guidance that he will discuss in more detail in a few minutes. While we've had a slightly more challenging start to the year than anticipated, I am still quite proud of quarter we delivered on top of outsized market leading growth in the Q1 of last year. With this in mind, I am cautious about the balance of the year and mindful of several dynamics. First, We continue to see a consumer pressured by a macroeconomic environment, a factor that is now expected To be more impactful than originally anticipated. 2nd, the Q1 is a critical timeframe for our business As Marpril is one of our 2 biggest selling periods of the year.

Speaker 2

Given that we have seen weakness across our original expectations, Coupled with the consumer continuing to lean into value, we will continue to leverage an increased promotional and clearance strategy in the 2nd quarter. As a result of these elements, we are lowering our sales and earnings guidance for 2023. That being said, We do believe these trends are temporary and expect to see improvement later in the year. With that, I'll pass it over to Jared. Jared?

Speaker 3

Thank you, Doug, and good morning, everyone. I want to reiterate Doug's comments and echo how proud we are of this organization's ability To manage through the current challenging macroeconomic environment, we remain on the path to evolve our business model as we demonstrate the power of our Brand building capabilities and I am pleased with the progress we have made on our journey to date. As you heard from Doug, it was a challenging Q1, Particularly on the top line and our adjusted EPS came in slightly below our expectations at $0.21 With the strong Q1 performance last year in both our retail and wholesale segments coupled with the challenges of the current Environment. We had communicated that the Q1 would most likely be our most difficult by far from a year over year comparison on both the top and bottom line. We continue to feel that this is the case.

Speaker 3

However, Q1 was slightly more challenging than anticipated and the trajectory Change into Q2 is not materializing as originally projected. From a retail perspective, we continue to react to the constrained discretionary consumer and saw an increasingly promotional environment across most of our retail peers. Additionally, we had an especially pressured March as weather did not support our all important Marpril expectations. This is a peak holiday for seasonal product, a category in which we dominate and over penetrate. From a wholesale perspective, we met expectations, which were down to last year due to many of our retail partners assuming a conservative stance with near term inventory adjustments.

Speaker 3

Now let me provide a bit more detail Now let me provide a bit more detail on our financial results. For the Q1, Sales decreased 10.7 percent to $742,100,000 compared to 2022, primarily as a result of the pressures on consumers, inventory tightening across the industry and a highly promotional retail environment. For the quarter, total retail comps were down 10% on top of a strong 15% comp in the Q1 of 2022. U. S.

Speaker 3

Retail comps specifically were down 12% for the quarter driven by the same pressures. However, On a 2 year stacked basis, comps were up 2%. Canada had a strong quarter posting comps up 3% on top of a robust 41% comp gain last year. Finally, the performance of vincecamuto.com continued to be positive with comps up 8%, which was particularly noteworthy given last year's comp gain of 20%. Consolidated gross margin was 32% in the 1st quarter While much of this decrease was planned given the work we had been doing since Fall of last year rebuilding our clearance business, we also saw some deleverage in the quarter given the promotional environments And deleverage of our fixed store occupancy costs.

Speaker 3

More importantly, gross margin continues to be structurally more robust than pre pandemic Our adjusted SG and A ratio for the Q1 was 28.9 percent of sales compared to 26.8% in the Q1 of 2022. Although we have deleveraged SG and A with a decrease in sales, we have recognized a significant cut in our expense base For the Q1, adjusted operating profit was 3.5 percent of sales compared to 6.6% in the prior year. For the Q1, we had $6,600,000 of net interest expense and our effective tax rate on our adjusted results was 25.7% compared to 29.3 Our first quarter adjusted net income was $14,300,000 or $0.21 Per diluted EPS versus $36,700,000 or $0.48 last year. Turning to inventory. We ended the Q1 with inventories of $637,400,000 compared to $672,500,000 last year.

Speaker 3

On a retail square footage basis, we ended the quarter down 4% versus the Q1 of 2022. Wholesale inventories ended the Q1 up 15%, but adjusted for the acquisitions of Topo and Keds, inventory would have been down 27% to last year. As we manage through the uncertainties of this year, we feel good about our inventory position heading into the 2nd quarter. We ended the quarter with $50,600,000 of cash and our total liquidity, which includes cash and availability under our revolver was 250.9 As of the end of the quarter, we had $200,300,000 available to draw on our revolving credit facility. As a reminder, we continue to await the receipt of our remaining $40,000,000 of our CARES Act tax refund due to us from the IRS, Which we expect as soon as the standard audits of the applicable prior tax years conclude.

Speaker 3

Before I conclude, I want to share a few remarks on our updated guidance. As we discussed last quarter, our original guidance assumed a pullback in consumer spending through the first half of the year with a soft landing in the 3rd quarter And a modest return to growth in the 4th quarter. With the Q1 performing slightly below our expectations and uncertainty continuing to linger, We believe that the recovery in consumer discretionary spending may be delayed. As a result, we are lowering our guidance. We have taken the appropriate steps to manage those factors under our control, including prudently managing our inventories and tightening up expenses across the board.

Speaker 3

As a result, The largest uncertainty lies squarely with the discretionary consumer. Accordingly, we are widening the range of our guidance to reflect And are now guiding to an adjusted EPS of $1.20 to 1 $0.50 per share. As you might expect, sales And our U. S. Retail segment remained the largest uncertainty for the balance of the year.

Speaker 3

In contemplating the high end of our guidance, We have taken into consideration the slightly slower start to the year than we experienced in Q1 and slower than anticipated start to the recovery in Q2. However, the top end of the range still assumes that the consumer returns to a more normalized buying patterns in the fall. That When coupled with increasingly easier comparables to last year, result in a return to net sales growth in the fall versus last year. More specifically, this assumes sales at our U. S.

Speaker 3

Retail segment down mid single digits to last year and consolidated sales at Designer Brands excluding Keds Are down mid single digits as well. On the lower end of our guidance, we have assumed that the consumer doesn't recover as quickly. This would result in fall delivering slightly lower sales than last year, albeit still much improved comp performance over spring, Given our newly elevated Nike relationship, opportunistic closeout buys we have secured, the extra week in the fiscal calendar And easier comparables to last year than we experienced in the spring. The low end of our range assumes sales at our U. S.

Speaker 3

Retail segment down in the high single digits to last year. Consolidated sales at Designer Brands excluding Keds also down in the high single digits to last year. I will now touch on the assumptions we've made for the other parts of our business within our guidance range. Regardless of the scenarios, Within our Canadian Retail business, we expect sales to be relatively flat to down low single digits to last year, given the continued post COVID recovery that Geography is experiencing. Additionally, in our brand segment, given the conservative posture with which we entered the year, We are not revising our guidance much.

Speaker 3

We now expect external wholesale excluding Keds to be down to fiscal 2022 by approximately 20% Versus the down 15% to 20% in our original guidance and we still anticipate our vincecamuto.com DTC site to be relatively flat to last year. As a reminder, we closed on the Keds acquisition at the beginning of the fiscal year. Since the acquisition, we are pleased to say that Keds has been delivering as expected And we continue to expect Keds to add approximately $75,000,000 to $85,000,000 of net sales across multiple including Wholesale, DTC, International and Canada. As I noted previously, it should be highlighted that while we are Excited about this acquisition and will recognize these incremental sales, we are not anticipating a material impact to profitability from these sales in the current year As a result of costs and investments related to the integration process, with an estimated tax rate of 29.8% At approximately 69,000,000 weighted average shares for the year, we arrive at our revised EPS guidance range of $1.20 to $1.50 per share. All of the guidance just discussed excludes the impact of the anticipated Dutch auction tender offer that we announced earlier today And related debt raise, which I will now discuss.

Speaker 3

After thoughtful consideration and discussion with management and our Board of Directors, Later today, we expect to launch a Dutch auction tender offer. We believe this represents a significant investment in our own stock That will allow us to efficiently and effectively increase value for our shareholders. We intend to offer to repurchase up To $100,000,000 in value of our Class A common stock at a price between $7 $8 per share Under our existing share repurchase authorization. The repurchase is conditioned upon obtaining financing, which we look to finalize with $1,000,000 term loan agreement prior to the expiration of the tender offer. The details of the anticipated tender offer can be found in the accompanying press release.

Speaker 3

As we navigate these uncertain and challenging times, we will continue to operate with a focus on growing value for our customers as well as an emphasis on managing our expense base and our inventory levels in both our retail and wholesale segments. I continue to be about the investments we have made in our brand portfolio and I'm looking forward to continuing the momentum of these latest acquisitions to support and diversify our revenue streams. With that, we will open up the call for questions. Operator?

Operator

Thank you. We will now begin the question and answer session. Our first question comes from Jay Sole from UBS. Please go ahead.

Speaker 4

Great. Thank you so much. Maybe just to start off, I'm interested if you can elaborate a little bit on this elevation of partnership with Nike. Can you just maybe tell us a little bit about how it came together? And I think before Nike was 6% of sales, maybe 7% of sales.

Speaker 4

I mean, are we going to have a full reversal and go back That level of sales with Nike and if you can sort of give us some detail around that, that would be helpful. Thank you.

Speaker 2

Yes. Hey, Jay, thanks for the questions. This is Doug. Obviously, we're very excited about the changes that the teams are making in the overall product portfolio. Elevating our relationship with Nike is obviously among them.

Speaker 2

It just really came they've been great partners. We've had ongoing dialogue for the past several months. And We're super excited to be able to bring that back across men's, women's and kids. That will happen in Q4, so Kind of November available to customer. Again, they've been great partners.

Speaker 2

We're excited to be able to offer that across Stores and digital will thoughtfully with their partnership build that business back. We're going to be focusing obviously on like I said men's, women's and kids. Big opportunity, I think, for both of us, just given our number 3 market share penetration in women's. And the customer will vote, but we'll continue You know, evolve our portfolio with them and other partners as well, but, obviously very excited about that.

Speaker 4

Got it. And then maybe just going to follow-up on that. You talked about just you want to touch on the guidance a little bit. You mentioned that The trajectory change in the business that perhaps you've been anticipating for Q2 hasn't yet materialized. Can you just talk about what you're seeing and sort of like what hasn't happened?

Speaker 4

And then Maybe also talk about when you said there's an increasingly promotional environment like what categories are you seeing that in and sort of where are you noticing the most kind of Seeing the most kind of increased in promotions?

Speaker 2

Yes, this is Doug again. Thanks, Jay. It's pretty equally spread across The categories to be honest with you, I mean, we're definitely seeing strength and buoyancy in the casual area, that casualization trend just continues. And men's, women's kids all very, very similar, which to us really just points to she's being much more discretionary With their income, right? And it's fairly broad based.

Speaker 2

I think the good news on that is we feel like there's parts of that that are in our control, obviously, when that rebound. We're being very thoughtful about our promotions, obviously, to be able to manage through that. We've always been known for value, so we certainly want to lean into that as a core competency. But I think we're just seeing a little bit of tampered demand. We had a lot of reasons to believe as we move through the back half of the year.

Speaker 2

Teams have done an amazing job of rebalancing the inventory, Both on the retail side and on the brand side, leaning into that casualization. So feel really good about the work the teams are doing there. Going to be launching an exciting fall marketing campaign, obviously excited for the first time to be able to launch and own brands in the athletic space with Latigre. And then as we said, really excited about elevating our relationship with Nike as we move into the back half of the year.

Speaker 4

Got it. Okay. Thank you so much.

Operator

There are no more questions in the queue. This I would like to turn the conference back over to Doug Howe for any closing remarks.

Speaker 2

Thank you. Well, hopefully, you heard through our remarks. Consistently, we are obviously focused on product. We're excited to continue to elevate our national brand portfolio Through the relationship with Nike, as I said, we're looking forward to launching Latigra, first time we've launched a known brand in that athletic space in August of this year. And I'll just close where I began by thanking our team for their continued hard work and dedication.

Speaker 2

I also want to thank our amazing brand partners. And thanks to all of you for joining us today.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now

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